Chap 007 - 2e by Wild and Shaw

Managerial Accounting

Wild and Shaw 2010 Edition

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All

rights reserved.

Chapter 7

Master Budgets and Performance Planning

7-3

Conceptual Learning Objectives

C1: Describe the importance and benefits of budgeting.

C2: Explain the process of budget administration.

C3: Describe a master budget and the process of preparing it.

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A1: Analyze expense planning using activity-based budgeting.

Analytical Learning Objectives

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P1: Prepare each component of a master budget and link each to the budgeting process.

P2: Link both operating and capital expenditures budgets to budgeted financial statements.

P3: Appendix 7A: Prepare production and manufacturing budgets.

Procedural Learning Objectives

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Advantages

Communicates plansand instructions

Promotes analysis anda focus on the future

Motivates employees

Provides a basis forevaluating performance against

past or expected results

Coordinatesbusiness activities

Defines goalsand objectives

Budget ProcessC 1

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Continuous or Rolling Budget

The budget may be a twelve-month budget that rolls forward one month as the current month is completed.

2009 2010 2011 2012

Budget TimingC 2

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Master Budget Components

Salesbudget

MerchandisePurchases

Prepare financial budgets: cash income balance sheet

Preparecapital

expenditurebudget

Prepareselling and

generaladministrative

budgets

C 3

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HOCKEY DENMonthly Sales Budget

October 2009 – January 2010

Budgeted Budgeted BudgetedUnit Sales Unit Price Total Sales

September 2009 (actual) 700 100$ 70,000$

October 2009 1,000 100$ 100,000$ November 2009 800 100 80,000 December 2009 1,400 100 140,000 Total 3,200 100$ 320,000$

January 2010 900 100$ 90,000$

Sales BudgetP1

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Hockey Den buys hockey sticks for $60.00 each and maintains an ending inventory equal to 90 percent of the next month’s budgeted sales. 900 hockey sticks

are on hand on September 30.

Inventoryto be

purchased=

Budgetedending

inventory+

Budgeted cost of salesfor the period

–Budgetedbeginninginventory

Let’s prepare the purchases budget for Hockey Den.

Merchandise Purchases Budget

P1

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HOCKEY DENMerchandise Purchases BudgetOctober 2009 – December 2009

October November DecemberNext month's unit sales 800 1,400 900 Ending inventory percentage × 90% × 90% × 90%Budgeted ending inventory units 720 1,260 810 Add current month's unit sales 1,000 800 1,400 Total units needed 1,720 2,060 2,210 Deduct beginning inventory units 900 720 1,260 Number of units to be purchased 820 1,340 950 Budgeted cost per unit × $ 60 × $ 60 × $ 60Budgeted cost of purchases 49,200$ 80,400$ 57,000$

Beginning inventory is last month's ending inventory.

Merchandise Purchases Budget

P1

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HOCKEY DENSelling Expense Budget

October 2009 – December 2009

October November December TotalBudgeted sales 100,000$ 80,000$ 140,000$ 320,000$ Sales commission % × 10% × 10% × 10% × 10%Sales commission 10,000$ 8,000$ 14,000$ 32,000$ Sales manager salary 2,000 2,000 2,000 6,000 Total selling expenses 12,000$ 10,000$ 16,000$ 38,000$

From Hockey Den’s sales budget

Selling Expense BudgetP1

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HOCKEY DENGeneral and Administrative Expense budget


October November December TotalAdministrative salaries 4,500$ 4,500$ 4,500$ 13,500$ Equipment depreciation 1,500 1,500 1,500 4,500 Total 6,000$ 6,000$ 6,000$ 18,000$

General and Administrative Expense Budget

P1

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CashBudget

(ExpectedReceipts &

Disbursements)

BudgetedIncome

Statement

BudgetedBalance

Sheet

Financial BudgetsP2

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40% of Hockey Den’s sales are for cash.

60% are credit sales (collected in full in the month following sale).

Let’s prepare the cash receipts budget for Hockey Den.

Budgeted Cash ReceiptsP2

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HOCKEY DENCash Receipts Budget


September October November DecemberBudgeted sales 70,000$ 100,000$ 80,000$ 140,000$ Accounts receivable 42,000$ 60,000$ 48,000$ 84,000$ Cash receipts from:Cash sales 40,000$ 32,000$ 56,000$ Collection of receivablesTotal cash receipts

40% of sales60% of sales


From Hockey Den’s sales budget60 percent of September sales are collected in October

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HOCKEY DENCash Receipts Budget


September October November DecemberBudgeted sales 70,000$ 100,000$ 80,000$ 140,000$ Accounts receivable 42,000$ 60,000$ 48,000$ 84,000$ Cash receipts from:Cash sales 40,000$ 32,000$ 56,000$ Collection of receivables 42,000 60,000 48,000 Total cash receipts 82,000$ 92,000$ 104,000$


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Hockey Den’s purchases of merchandise are entirely on account.

Full payment is made in the month following purchase.

The September 30 balance of Accounts Payable is $58,200.

Let’s look at cash disbursementsfor purchases for Hockey Den.

Cash Disbursements for Purchases

P2

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HOCKEY DENCash Disbursements for Purchases

October 2009 - December 2009

October payments (September 30 balance) 58,200$ November payments (October purchases) 49,200 December payments (November purchases) 80,400

From merchandise purchases budget

Cash Disbursements for Purchases

P2

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Hockey Den: Will pay a cash dividend of $3,000 in November. Will purchase $25,000 of equipment in

December. Has an income tax liability of $20,000 from the

previous quarter that will be paid in October. Has a September 30 cash balance of $20,000. Has an agreement with its bank for loans at the

end of each month to enable a minimum cash balance of $20,000. Continue

Cash BudgetP2

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Hockey Den: Pays interest equal to one percent of the prior

month’s ending loan balance. Repays loans when the ending cash balance

exceeds $20,000. Owes $10,000 on this loan arrangement on

September 30. Has 40 percent income tax rate. Will pay taxes for current quarter next year.

Let’s prepare the cash budget for Hockey Den.

Cash BudgetP2

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HOCKEY DENCash Budget


October November DecemberBeginning cash balance 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissionsSales salariesAdministrative salariesIncome taxesDividendsInterestEquipment purchaseTotal disbursementsPreliminary balance

From Cash Disbursementsfor Purchases

P2 From Cash Receipts Budget

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October November DecemberBeginning cash balance 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissions 10,000 8,000 14,000 Sales salaries 2,000 2,000 2,000 Administrative salariesIncome taxesDividendsInterestEquipment purchaseTotal disbursementsPreliminary balance

From Selling Expense Budget

P2

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October November DecemberBeginning cash balance 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissions 10,000 8,000 14,000 Sales salaries 2,000 2,000 2,000 Administrative salaries 4,500 4,500 4,500 Income taxes 20,000 DividendsInterest 100 Equipment purchaseTotal disbursements 94,800$ Preliminary balance 7,200$

.01 × $10,000

Because Hockey Denmaintains a minimum

cash balance of $20,000,the company must

borrow $12,800.

P2

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October November DecemberPreliminary balance 7,200$ Additional borrowing 12,800 Loan repaymentEnding cash balance 20,000$ Ending loan balance 22,800$

Ending cash balance for October is the beginning November balance.

Cash Budget ContinuedP2

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October November DecemberBeginning cash balance 20,000$ 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ 112,000$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissions 10,000 8,000 14,000 Sales salaries 2,000 2,000 2,000 Administrative salaries 4,500 4,500 4,500 Income taxes 20,000 Dividends 3,000 Interest 100 228 Equipment purchaseTotal disbursements 94,800$ 66,928$ Preliminary balance 7,200$ 45,072$

.01 × $22,800Cash balanceis sufficientto repay the

$22,800 loan.

P2

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October November DecemberBeginning cash balance 20,000$ 20,000$ 22,272$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ 112,000$ 126,272$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissions 10,000 8,000 14,000 Sales salaries 2,000 2,000 2,000 Administrative salaries 4,500 4,500 4,500 Income taxes 20,000 Dividends 3,000 Interest 100 228 Equipment purchase 25,000 Total disbursements 94,800$ 66,928$ 125,900$ Preliminary balance 7,200$ 45,072$ 372$

P2

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October November DecemberPreliminary balance 7,200$ 45,072$ 372$ Additional borrowing 12,800 19,628 Loan repayment (22,800) Ending cash balance 20,000$ 22,272$ 20,000$ Ending loan balance 22,800$ $ 0 19,628$

Cash Budget ContinuedP2

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HOCKEY DENBudgeted Income Statement

For Three Months Ended December 31, 2009

Sales (3,200 units @ $100) 320,000$ Cost of goods sold (3,200 units @ $60) 192,000 Gross profit 128,000$ Operating expenses: Sales commissions 32,000$ Sales salaries 6,000 Administrative salaries 13,500 Equipment depreciation 4,500 Interest expense 328 56,328 Net income before taxes 71,672$ Income tax expense 28,669 Net income 43,003$

From the Sales BudgetP2

From the Merchandise Purchases Budget

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From the SellingExpense Budget

P2

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From the General and Administrative Expense Budget

Depreciation is a non-cash expense.

P2

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Sales (3,200 units @ $100) 320,000$ Cost of goods sold (3,200 units @ $60) 192,000 Gross profit 128,000$ Operating expenses: Sales commissions 32,000$ Sales salaries 6,000 Administrative salaries 13,500 Equipment depreciation 4,500 Interest expense 328 56,328 Net income before taxes 71,672$ Income tax expense 28,669 Net income 43,003$ From the Cash Budget

P2

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$71,672 × .40

P2

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Hockey Den reports the following account balances on September 30 prior to preparing its budgeted financial statements: Equipment $200,000 Accumulated depreciation $ 36,000 Common stock $150,000 Retained earnings $ 41,800

Let’s prepare the budgeted balancesheet for Hockey Den.

Preparing a BudgetedBalance Sheet

P2

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HOCKEY DENBudgeted Balance Sheet

December 31, 2009

AssetsCash 20,000$ Accounts receivable 84,000 Inventory 48,600 Equipment 225,000$ Less accumulated depreciation 40,500 184,500 Total assets 337,100$

Liabilities and EquityLiabilities Accounts payable 57,000$ Income taxes payable 28,669 Bank loan payable 19,628 105,297$ Stockholders' equity Common stock 150,000$ Retained earnings 81,803 231,803 Total liabilities and equity 337,100$

From the Cash Budget

P2

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December 31, 2009



From the MerchandisePurchases Budget

P2

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December 31, 2009



From the Budgeted Income Statement

P2

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December 31, 2009



From the Cash Budget

P2

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December 31, 2009



Beginning retained earnings 41,800$ Add net income 43,003 Deduct dividends (3,000) Ending retained earnings 81,803$

P2

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Activity-Based Budgeting Activity-based budgeting is based on

activities rather than traditional items such as salaries, supplies, depreciation, and utilities.

A1

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End of Chapter 7

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Chap 007 - 2e by Wild and Shaw